The Buzz Around Blockchain

July 19, 2016

Blockchain is the databasing innovation widely considered to be a primary value point extracted from Bitcoin’s implementation. Let’s say an organization has 10 transactions per second. Each of those transactions receives its own digital signature. Using a tree structure, those signatures are grouped together and given a single digital fingerprint, which provides a unique representation of those transactions at a specific time. That fingerprint is then sent up the tree to the next layer of infrastructure. This process occurs for every organization in the network until there is a single digital fingerprint that encompasses all the transactions during that particular second. Once validated, that fingerprint is stored in a blockchain that all the participants can see. A copy of that ledger is also sent back to each organization to store locally. Those signatures can be continuously verified against what is in the blockchain, giving companies a way to monitor the state and integrity of a particular asset or transaction. As a public ledger for transactions that’s main purpose is to secure digital fingerprints corresponding to various data blocks, Blockchain has gained a great deal of traction in the finance world and beyond.

In banking, Blockchain provides the ability to monitor and catalogue transactions on an unprecedented level. ThoughtMachine, a financial technology company in the UK, recently developed an entire operating system which leverages Blockchain in part to secure its transaction history. This newly developed OS is geared towards larger financial institutions; however, efforts to create Blockchain innovations are far more widespread. In late June, W3C held a conference on developing Blockchain technologies, where key members of IBM, Ethereum, Eris Industries and MIT’s Digital Currency initiative were in attendance. This conference focused on creating a standardized approach towards working with Blockchain as well as creating a secure user environment within Blockchain platforms.

With Blockchain, transactions are easily verified, viewable, collected and sorted chronologically. The newly popular transaction database hosts a website where all of its transactions are openly logged and constantly updated, which allows for users to search through and view specific entries. Over 1,000 technology firms across the globe have already implemented Blockchain in their products, many of which are garnering both attention and business.

One of the main advantages that the blockchain architecture provides for financial institutions is that it allows a distributed network of computers to reach a consensus without the need for a central authority. Trades are often verified by third party intermediaries. This intermediary is known as a clearinghouse and maintains its own central ledger. However, this method can take several days to settle transactions, and the clearinghouse’s services usually has some sort of fee.
The implementation of Blockchain technology would render the clearinghouse irrelevant by giving each participant in the network its own copy of the ledger. A common network protocol and consensus mechanism would allow participants to communicate with one another. Using this method, transactions could be approved almost instantaneously, which would significantly cut costs and boost efficiency tremendously.

Although blockchain seems like an extremely promising technology in the financial sector, it has its fair share of challenges to overcome. One problem with getting a widespread enterprise adoption of blockchain technology is the need to make the network of participants, all of which have a different suite of back-office systems, agree on a common network protocol.

In addition, since institutions are still experimenting with this technology, there are not yet clear standards to dictate how blockchain will be implemented across the enterprise. Some companies may choose to use the bitcoin network, while others may opt for “permissioned” or semi-private blockchains. Experts believe that the development of the technology also will bring its own regulatory hurdles and potential cybersecurity threats. Therefore, given the many industries that can benefit from Blockchain, creating an easily accessible, secure and mutually profitable set of guidelines would be very useful. The ISITIC (International Securities Association for Institutional Trade Communication) in Europe recently released a set of benchmarks in attempting to push towards Blockchain’s standardization. These benchmarks deal with implementation in various scenarios both domestically and internationally, with a focus on creating mutual beneficial partnerships between existing firms. However, issues of widespread adoption and thorough implementation could hamper Blockchain’s expansion.

Many questions revolving around security and privacy are still unanswered. In financial services, it’s unclear exactly how much information about a trade should be available to each participant to verify a transaction while still keeping the contents of a particular trade private. While there are many uncertainties regarding Blockchain, it is safe to assume that its prominence will only increase going forward given its widespread implementation

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About the Author

Kabir Khanna

Kabir is an intern in the marketing department at CompuGain, he mainly focuses on managing social media engagement, and studies Math and Economics at Bard College in upstate New York. He’s worked in marketing at multiple other locations, has a keen interest in pursuing a career in consulting, financial analysis, and strategic management. In his academic career, Kabir studies how markets react to specific stresses in the global economy and how to construct enterprise wide strategies for success in those markets. He was an avid debater in high school, taking part in many state wide and national tournaments, and enjoys producing and mixing music as well as tennis in his spare time.

About the Author

Ritvik.Buddharaju@compugain.com

Ritvik Buddharaju is an Intern here at CompuGain and is currently attending Virginia Tech. He is studying Business Information Technology, which pertains to developing computer systems and using quantitative methods to tackle business problems. He also plans to earn a minor in Actuarial Science. In the future, Ritvik would like to eventually enter the field of Computational Finance. For his interests, Ritvik loves to play and analyze basketball, and also plays video games in his spare time.